Assume That the Long-Run Aggregate Supply Curve Is Vertical at Y

question 54

Essay

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0.The aggregate demand curve is Y = 3(M/P)and M = 1,000.a.If the economy is initially in long-run equilibrium,what are the values of P and Y?
b.Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5.What are the new short-run P and Y?
c.If the aggregate demand curve and long-run aggregate supply curve are unchanged,what are the long-run equilibrium P and Y after the supply shock?
d.Suppose that after the supply shock the central bank wanted to hold output at its long-run level.What level of M would be required? If this level of M were maintained,what would be long-run equilibrium P and Y?

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